The subprime-mortgage mess and the ensuing credit crisis continues to exact a toll on the financial-services sector, meaning we can be certain those write-downs won't be ending anytime soon. Oil prices can't seem to find a ceiling as new records are again being set – regardless of whether you choose to call it market fundamentals or speculation. The U.S. Federal Reserve surveyed the financial landscape last week and left interest rates unchanged for the time since September as Chairman Ben S. Bernanke & Co. try to find a compromise between a slow (and hopefully not recessionary) economy and escalating inflation.

A new debate rages on with some analysts forecasting an August rate hike, while others expect no activity until after the November elections. The European Central Bank meets in the coming days and is expected to bump up its short-term rate, putting additional pressure on the U.S. dollar and on Bernanke. On one hand, the economy remains weak (though not recessionary at this point) and higher rates could prove devastating. On the other hand, rising commodity prices could trickle (or free-flow) into other areas, inflation could escalate, and higher rates would be justified (needed) to offset those price risks. (Sounds a bit like another Catch-22.)

The economic calendar remains hectic in advance of the July 4 holiday. Traders will have to settle for a mere three-day weekend as Thursday brings the much-anticipated unemployment and nonfarm-payroll reports, which will give us another view of the struggling U.S. labor market. Crucial news from manufacturing (Institute for Supply Management and factory orders) should reveal whether the factory sector is still contracting.

Market Matters

Once upon a time, homeownership became much more than the American Dream. It became more of an entitlement as politicos grandstanded for virtually everyone to be able to afford a house. Then, lenders began offering "less-than-qualified" buyers some "interesting" rates and real estate speculators took advantage of easy terms, fully intending to flip properties for quick profits. Greedy investors bought those complex mortgage securities to enhance the yield in their portfolios and credit agencies failed to recognize the actual risks involved. Regulators often turned the other way and allowed the entire debacle to escalate into a full-fledged credit crisis.

Last week, California's attorney general sued Countrywide Financial Corp. (CFC), claiming deceptive advertising and unfair competition. Meanwhile, Securities and Exchange Commission Chairman Christopher Cox has moved onto the hot seat for not doing enough to intervene or attempting to restore confidence in the financial system as the crisis spread out of control. History shows that past SEC chairs took far more active roles during such challenging times as the collapse of junk-bond king Drexel BurnhamLambert and the economic aftermath of 9-11; and yet Cox has seemed AWOL throughout, allowing Bernanke and U.S. Treasury Secretary Henry Paulson to offer plans and compete for headlines.

And that begs the question some on Wall Street are asking these days: Just how relevant is the SEC these days?

Financials took shots at each other this week as Goldman Sachs Group Inc. (GS) lowered its rating on the whole sector from "Attractive" to "Neutral;" Lehman Brothers Holdings Inc. (LEH) and SanfordBernstein & Co. LLC predicted additional write-downs for Merrill Lynch & Co. Inc. (MER); and Wachovia Corp. (WB) downgraded Goldman (perhaps a little tit for tat?). Citigroup Inc. (C) kept those pink slips flying in their investment banking area as the one-time global giant continued to struggle through billion-dollar losses.

Barclays PLC (ADR: BCS) turned to Middle East sovereign funds (namely the Qatar Investment Authority) for a significant capital infusion. And news from the non-financial world was not much better. UPS, Inc. (UPS) reduced its profit forecast; TheDow Chemical Co. (DOW)announced new price hikes; Blackberry-device-maker Research in Motion (RIMM) missed on its quarterly earnings and lowered future estimates; and General Motors Corp.'s (GM) stock price fell to a 53-year low. Oil prices surged further into record territory (over $142/barrel) on some untimely comments by the leader of the Organization of the Petroleum Exporting Countries and more of a run-up in commodities as global equities tumbled.

The bears officially came out of hibernation as the Dow Jones has plunged some 20% below the highs hit back in October 2007 to its lowest level in about two years (a 20% decline represents the definition of a bear market). Investors fretted over the weak financial company news (particularly the projections offered by their own analysts) and, of course, the never-ending rise in oil.

On the international front, the MSCI World Index fell to its lowest level since March – and is also on track for its worst monthly performance in almost six years. Bonds moved higher on a "flight-to-quality" as the yield on the benchmark 10-year Treasury once again fell below the 4% level.

Market/ Index

Year Close (2007)

Qtr Close (03/31/07)

Previous Week(06/20/08)

Current Week (06/27/08)

YTD Change

Dow Jones Industrial

13,264.82

12,262.89

11,842.69

11,346.51

-14.46%

NASDAQ

2,652.28

2,279.10

2,406.09

2,315.63

-12.69%

S&P 500

1,468.36

1,322.70

1,317.93

1,278.38

-12.94%

Russell 2000

766.03

687.97

725.73

698.14

-8.86%

Fed Funds

4.25%

2.25%

2.00%

2.00%

-225 bps

10 yr Treasury (Yield)

4.04%

3.43%

4.14%

3.99%

-5 bps

Economically Speaking

"The downside risks to growth appear to have diminished somewhat, while the upside risks to inflation and inflation expectations have increased."

And on that note, the Fed left its funds rate unchanged at 2%, foregoing another rate cut for the first time in 10-months. And those talking heads are already focused on the next policy meeting. So what's the next move (see below)?

While some analysts believed the country had been mired in recession, the current data dismisses that notion. The final revision of first-quarter gross domestic product (GDP) depicted economic growth of 1%, a far cry from the more desired increases to 2.5% to 3.0%, but still not reflective of a recession. While existing home sales increased in May, the median home price actually declined by more than 6% from last year's levels.

Story continues below…

Further, new home sales fell for the sixth time in the past seven months and a Case-Shiller price index showed that single family housing prices have now fallen to levels not seen since 2004. A recent Harvard University study reported that the current housing slump is the worst seen since World War II; record foreclosures will make any rebound quite difficult for the foreseeable future. Consumers hit the malls as personal spending climbed by 0.8% in May, though economists worry that future releases will deteriorate once individuals have spent those tax rebate checks. Two separate confidence measures pointed to persistent problems on the consumer front. The Reuters/University of Michigan survey fell to a 28-year low, while the Conference Board's consumer confidence index recorded its fifth-worst-showing ever.

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.

By submitting your email address you will receive a free subscription to Money Morning and receive Money Morning Profit Alerts. You will also receive occasional special offers from Money Map Press and our affiliates. You can unsubscribe at anytime and we encourage you to read more about our privacy policy.

You can view our VQScore top-rated stocks now by entering your email below:

By submitting your email address you will receive a free subscription to VQScore and occasional special offers from Money Map Press and our affiliates. You can unsubscribe at anytime and we encourage you to read more about our privacy policy.

Today's Markets

DJIA216.84(0.84%)25,962.51

NASDAQ109.99(1.42%)7,838.96

S&P30.65(1.09%)2,854.88

ABOUT MONEY MORNING

Money Morning gives you access to a team of ten market experts with more than 250 years of combined investing experience – for free. Our experts – who have appeared on FOXBusiness, CNBC, NPR, and BloombergTV – deliver daily investing tips and stock picks, provide analysis with actions to take, and answer your biggest market questions. Our goal is to help our millions of e-newsletter subscribers and Moneymorning.com visitors become smarter, more confident investors.

By submitting your email address you will receive a free subscription to Money Morning and receive Money Morning Profit Alerts. You will also receive occasional special offers from Money Map Press and our affiliates. You can unsubscribe at anytime and we encourage you to read more about our privacy policy.